Income Statement

Cards (8)

  • what is an income statement?
    1. it describes the income and expenditure of a business over a period of time, usually a year
    2. it shoes the profit or loss made by the business
    3. it’s also known as the profit and loss account
  • sections of the income statement
    revenue - turnover or sales income generated from sales
    cost of sales - costs linked directly to the production of the product or service
    gross profit - revenue minus cost of sales, shows how efficiently a business is converting its raw materials into finished products
    expenses - indirect costs that are not directly related to producing the product or service
    operating profit - gross profit minus expenses, profit earned from normal trading activities
  • sections of the income statement
    exceptional items - items that have a one-off effect on profits
    finance income - any interest paid to the company on money lent or saved
    finance expenses - any payments of interest on loans held
    profit before tax - operating profit minus finance expenses plus any finance income
    profit for the year - profit before tax minus taxation
  • purposes of the income statement
    1. to measure company performance and the impact of strategies
    2. owners can assess their return on investment
    3. to abide by legislation as part of being a limited company
    4. gives an idea for profit quality
    5. used to compare with other firms and past trends
  • profit quality
    high quality profit - source of profit is like toy to continue in the future
    low quality profit - result of actions that are unlikely to occur again
  • profit utilisation
    1. dividends paid to shareholders
    2. retained profit
  • dividends paid to shareholders
    companies will decided at the end of every financial quarter whether to pay dividends or not from any profit they have made, this is decided by the board of directors
  • retained profit
    board of directors will decide to retain profit to reinvest in the business to maintain its liquidity, fund its strategies and to invest in future expansion and capital investment